"Anything is possible, and the unexpected is inevitable. Proceed accordingly." - Jason Zweig
The month of May comes to an end, and it couldn't come soon enough for the bulls. The Sell in May aficionados can finally claim victory. It has been seven years since May posted a negative result, and this year, they are finally right.
Three straight weeks of declines for the S&P turned into four, and five straight weekly declines for the Dow turned into six. The DJIA is down 6.46% over the course of this current losing streak, which would go down as the mildest six-week losing streak for the index since June 1976 and the fifth "mildest" six week losing streak on record. There is precedent for the Dow 30 to fall seven weeks in a row.
Once again the trading week started on a sour note as the S&P suffered a fifth straight week of losses in the first trading day of the week. For the week the S&P was off 2.6% and the Dow lost 2.9%. That all sounds pretty bleak, but let's not lose sight of the facts. This is the first down month of the year. We had four months of market returns that were positive, and at the close on Friday, the S&P remains with a gain of 9.8% for the year.
From a year-to-date global perspective, the U.S. equity market has held up better than most areas around the world. No surprise as the U.S. is also exhibiting better fundamentals. On the flip side, China has been a global laggard since the tariff re-escalation in early May.
However, emerging markets are quietly rallying on a relative basis. EM ETFs are up broadly versus the U.S. market this past week and have held up pretty well in May. Brazilian equities have been quietly salvaging things in the second half of May as the iShares Brazil ETF (EWZ) is on pace for its second straight week of 5% gains. After trading down as much as 10.6% month to date at the recent lows, EWZ has erased all of its losses.
Chinese "A" shares started the year off with a 42% gain and have now given about 14% of that back. The index looks like it is in the process of forming a base, and entering a consolidation pattern. However, all of these intermediate-term trends likely hinge on trade negotiations and whether escalation continues past June.
There are definitely a number of valid concerns out there for investors to be focusing on. Global economies remain weak, and even U.S. economic data shows signs of weakness at times. The biggest headwind is the mindset associated with Chinese and now Mexican tariff issues. Emotion and sentiment are in control now.
No one really can know how things will play out, while sentiment may have been too complacent towards a deal getting done with China earlier in the year, the pendulum has swung the other way. Many Wall Street firms, analysts, economists, and investors are beginning to fear the worst. Speculating on what comes next and looking far down the road isn't my way of doing things.
The view on market strategy here is a bit different and suggests a more methodical, calculating way of approaching investing in equities. After establishing the primary trend, the idea is to take the overall situation in steps, avoiding thinking too far ahead. Trying to put together a strategy for the near term is difficult enough. Looking out months or a year down the road is next to impossible, especially when market stress is part of the equation. The primary focus should center on two things. Those that are important, and those that I can control. Anything else is wasted effort and yields nothing. Running with "what if" scenarios accomplishes little. The situation today is one of those where decisions become more critical than ever.
The Treasury yield, Iran, North Korea, Eurozone and the fallout from Brexit, China hard landing, etc. are issues that have been a part of the investing landscape for a while, and investors have dealt with them. It will be necessary to continue dealing with them in a logical fashion if they are to continue to be successful. Yet many pundits want to highlight them as if they just arrived on the scene. Over time, issues get resolved one way or another. The attempts to predict the outcome of those events in the scope of an investment strategy is rarely fruitful. All of them remain out of an investor's control.
Q1 GDP growth was revised down fractionally to a 3.1% pace, beating forecasts, after posting a better-than-expected 3.2% gain in the Advance report. Remember, Q4 posted a 2.2% clip.
Q2 GDP forecasts remain weak; the GDPNow model estimate for real GDP growth in the second quarter of 2019 is 1.3 percent on May 24, up from 1.2 percent on May 16.
This week the media centered on the retail sector and the pundits joined in telling anyone that would listen that retailers may be in big trouble because of the tariffs. According to some, the tariff situation has cast a pall over the consumer. Really? Are these people serious? First, when was the brick and mortar retail sector not in trouble since the proliferation of online sales. Second, the average consumer has zero clue about the tariff situation that some investors are having strokes over. That is NOT to say the consumer isn't educated; the other data points don't back ANY of that theory.
Conference Board Consumer confidence rose in May to a six-month high of 134.1 from 129.2 in April and 124.2 in March. Confidence now lies well above the 16-month low of 121.7 in January, but below the three-month string of 18-year highs that ended with a 137.9 reading in October.
Lynn Franco, Senior Director of Economic Indicators at The Conference Board:
"Consumer Confidence posted another gain in May and is now back to levels seen last Fall when the Index was hovering near 18-year highs. The increase in the Present Situation Index was driven primarily by employment gains. Expectations regarding the short-term outlook for business conditions and employment improved, but consumers' sentiment regarding their income prospects was mixed. Consumers expect the economy to continue growing at a solid pace in the short-term, and despite weak retail sales in April, these high levels of confidence suggest no significant pullback in consumer spending in the months ahead."
If I try to connect the dots, the entire tariff/consumer fear rhetoric isn't in alignment with some of the other data points.
April personal income rose 0.5% with spending up 0.3%. The 0.1% increase in March income was not revised, but spending was bumped up to a 1.1% gain from 0.9%, though February was nudged down to flat from 0.1%.
Dallas Fed manufacturing index dropped 7.3 points to -5.3 in May, much weaker than expected, after falling 4.9 points to 2.0 in April. It's the lowest since December's -6.9. Over the past two years, the index has ranged from -6.9 to 38.2 in February 2018.
Pending home sales fell 1.5% to 104.3 in April, a smaller slump than analysts' forecast, following March's 3.9% jump to 105.9. The latter was the best since July, and the index was at 106.4 a year ago. The level's range since 2017 has been 98.7 (December 2018) to 112.2 (February 2017)
Lawrence Yun, NAR chief economist:
"The sales dip has yet to account for some of the more favorable trends toward homeownership, such as lower mortgage rates. Though the latest monthly figure shows a mild decline in contract signings, mortgage applications and consumer confidence have been steadily rising. It's inevitable for sales to turn higher in a few months."
"Home price appreciation has been the strongest on the lower-end as inventory conditions have been consistently tight on homes priced under $250,000. Price conditions are soft on the upper-end, especially in high tax states like Connecticut, New York and Illinois. The supply of inventory for homes priced under $250,000 stood at 3.3 months in April, and homes priced $1 million and above recorded an inventory of 8.9 months in April."
"We are seeing migration to more affordable regions, particularly in the South, where there has been recent job growth and homes are more affordable.,"
German retail sales missed badly, falling 2% month over month while expectations were for a 0.4% gain.
Chinese manufacturing PMI fell to 49.4 from 50.1 in April. Analysts polled by Reuters had expected the indicator to drop to 49.9 in May.
Theresa May's announcement that she will step down as U.K. prime minister has been speculated for some time and is not a surprise. If we remember correctly, she offered to resign in March if a Brexit deal passed. For the moment, the U.S. market doesn't seem concerned. So the question is who will be the next Tory leader when she leaves on June 7. Boris Johnson and Dominic Raab, who both voted to leave the EU, are seen as front runners. U.K. equities may remain challenged until the new leadership emerges as investors have opportunity to evaluate their Brexit strategy.
European politicians and negotiators have repeatedly said they are not prepared to renegotiate and further concessions are out of the question. This sets up the probability of a prolonged confrontation. Stay tuned.
I reiterate what I mentioned last week:
"At the moment, not many investors are contemplating how companies are not only dealing with the tariff issue today, but how they will attack the situation in the coming months."
FactSet Research weekly update:
"Despite Tariff Concerns, Analysts Making Smaller Cuts Than Average to EPS Estimates for Q2".
The Q2 bottom-up EPS estimate dropped by 2.1% (to $40.61 from $41.46) during this period. During the past five years, the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 2.5%. During the past 15 years, the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 3.1%.
One might want to conclude that tariffs should be taking these estimates down much more. That doesn't seem to be the case. So far all remains "in line". As the bottom-up EPS estimate for the index declined during the first two months of the quarter, the value of the S&P 500 also decreased during this same period. From March 31 through May 30, the value of the index decreased by 1.6%.
The forward 12-month P/E ratio for the S&P 500 is 15.9. This P/E ratio is below the five-year average (16.5) but above the 10-year average (14.8).
A market participant can decide to pay attention to ALL of the data points or listen to select headlines.
The Political Scene
The momentum in the U.S.-China trade relations has become more negative in recent weeks. Growing trade tensions as both sides jockey for position lowers the odds for much progress being made before the G-20 meeting. Many then conclude that equities offer an unfavorable risk vs. reward over the short term unless the negotiations shift to a positive tone.
This past week China said it is ready to use "rare earths" to strike back in the trade skirmish. Rare earths are a group of 17 chemical elements used in everything from high-tech consumer electronics to military equipment.
When emotion is on the scene, any logical evaluation of the market is tossed aside. So while the short-term views look bleak to many pundits, there is a decent probability that this will not end as badly as some predict.
While the current administration has chosen to deal aggressively with the U.S./Chinese trade relationship, this is hardly a new topic. Ryan Detrick points this out in his recent commentary. Seven years ago this was the sentiment regarding China.
Believing that this negotiation would be easy, or it would be resolved in an expedient manner was simply wishful thinking. Yet the media pundits have pounded the table for a deal from day one increasing investor angst.
On Friday the focus switched to the new proposals for adding tariffs on Mexican imports, in an effort to pressure the Mexican government to assist in stopping the flow of illegal immigrants across the border. The immediate reaction was to hit the sell button.
The 3-month/10-year Treasury curve inverted last week and that spread increased this week. Take the following for what it is worth. Historically an inversion in the curve has an 18 to 24 month lead time before recession. Furthermore in that period of time, stocks have done quite well.
The 2-year/10-year has yet to invert.
Source: U.S. Dept. Of The Treasury
The 2-10 spread started the year at 16 basis points; it stands at 19 basis points today.
The AAII weekly sentiment survey remains with a bearish slant this week, though bullish sentiment saw a small increase. 24.7% of respondents reported bullish sentiment this week. Bearish sentiment rose to an extreme this week. That is the first time that bearish sentiment is at an extreme high while bullish is also at an extreme low since late December 2018. This week's increase up to 40% brings bearish sentiment around 10 percentage points above the historical average.
Investors aren't cautious, they are in an absolute state of fear. SentimenTrader posted this chart yesterday.
The Weekly inventory report posted a decrease of 0.3 million barrels. At 476.5 million barrels, U.S. crude oil inventories are now about 5% above the five-year average for this time of year. Total motor gasoline inventories increased by 2.2 million barrels last week and are 1% above the five-year average for this time of year.
Global demand fears remain in the forefront of traders' minds. WTI closed the week at $53.23, down $5.97 for the week and $9.66 in the last two weeks.
The Technical Picture
The pullback has now reached 6+% as the slow meltdown in price continues. Once the prior low of 2,800 was broken, it immediately signaled the drawdown was not over. The series of higher lows was broken as well. It also triggered sell programs that were set to sell if violated, and we now have a series of lower lows in this drawdown. The consensus view has the 2,800 level as their line in the sand and expect another waterfall decline to ensue.
Chart courtesy of FreeStockCharts.com
The 200-day moving average (brown line) residing at 2,776 was also breached when the headlines on Mexico took down the indices on Friday. I am not of the opinion that ONE particular price level presents a point of no return. There are numerous support and resistance levels that always come into play, as with any rally or drawdown, the situation is a fluid one.
The S&P is now in an extreme oversold condition, with my indicators looking similar to the December 24th lows. That should kick of a reflex bounce. We will then need to see how long and lasting it might be. When emotion is involved, both overbought and oversold conditions can last a long time.
No need to guess what may occur; instead it will be important to concentrate on the short-term pivots that are meaningful. However, the Long Term view, the view 30,000 feet, is the only way to make successful decisions. These details are available in my daily updates to subscribers.
Short term views are presented to give market participants a feel for the current situation. It should be noted that strategic investment decisions should NOT be based on any short-term view. These views contain a lot of noise and will lead an investor into whipsaw action that tends to detract from overall performance.
It's FONGO, The Fear Of Not Getting Out. The more I listen to market participants now, it is fairly obvious that we really don't have a lot of people with an investor mindset managing their money today. I'm not suggesting that everyone has to have a 20-30 year mindset when they invest in the equity market. Nor a mindset that has them sitting through the next bear market. It is easy to understand how some simply don't have that luxury, and therefore it is not plausible for them to think that way.
The issue that I see, most don't want to sit through ANY pullback, not to mention a very normal 10% correction. Commentary this week noted that the market is going through a real rough patch now. Rough patch? What do they call a 10-15% market correction? Far too many have to do something when they feel stress. Between a new high and a 6% drawdown, they see the need to raise a lot of cash, start hedging and so on, yet by definition this is not even a correction! The Fear of Not Getting out has taken over.
All one has to do is browse the commentary here for the last three weeks while the S&P sat at 4% from the last all-time high. I hear more and more clients that have the same approach. I'm apparently left behind because they can apparently see into the future, or maybe they decide to mesh the headlines with their fears and they lose touch with reality. My guess it is the latter.
Each has to decide for themselves how they should manage their money. All I will do is share the experience that has shown that is not the way to build wealth over time. The best of luck to those that feel otherwise.
FONGO? No one can guarantee they will get investors out at the exact top. However, there is a strategy that will allow an investor to reap the oversized rewards of any bull market profits, while at the same time get them out preserving the lion's share of those gains. We witnessed how that worked in 2007 and 2008, and once again in real time a mere five months ago.
Individual Stocks and Sectors
The flight to safety has been enormous recently. The rally for Utilities and decline for Technology have changed valuations in the two sectors dramatically, to the point where their trailing 12-month P/E ratios are nearly the same.
Considering that tech companies grow in the high double digits and Utilities grow earnings a 3%, the distorted picture is evident.
Tech's P/E currently stands at 20.4, well below the reading near 24 it had in late 2018. The Utility sector has seen its P/E balloon to 20, which is nearly 5 points higher than it was at the end of 2018. What this clearly shows is that investors simply have little to no confidence as they prefer the safety which they perceive to be in the low-growth, income-producing stocks.
The headlines read "Worst Month For Semiconductors Since 2008". The VanEck Vectors Semiconductor Index (SMH) rallied 37% this year hitting a new high on April 24th. The index is down approximately 17% since that high was achieved. Periods of out-performance are followed by periods of under-performance and consolidation. There is nothing unusual when that occurs. If we didn't get these pullbacks, prices would go on unabated, creating a bubble like atmosphere that would end much worse.
However, I believe we will need to see the semis start to regain their footing and rally, or the overall market will continue to struggle. To that end, there has been a tiny bounce right around support levels.
The same situation holds true for the FANG stocks. After outperforming the S&P 500 by 75% from 2017 through mid 2018, the FANG stocks have been underperforming the S&P 500 for nearly a year now. Down 22% vs. the overall market since they peaked last July.
Each investor can now decide how they wish to use this information. Specific recommendations are available to Savvy Investor members.
We hear the people that have come out and voiced their views about why all of what we have seen in this bull run is so wrong and are obsessed with their being right in debates. Admonishing the investment world for what in their minds should be happening every chance they get. So much so that they have lost sight of making money.
The beauty and attraction of the investing world for me is that one need not have a PhD after their name. In fact, I maintain that simple everyday common sense rules the investment world. Take that PhD in love with their own theories, and I will show you someone who's about to blow up when the environment changes.
The obsessing over one metric or another like a child holding onto their security blanket has been pervasive, and in doing so they have turned their back on to what is actually taking place. There is that overconfident academic who has their infallible system, but blames the market when it goes against them. They are in my view fanatics with no understanding of adaptive systems.
We have also witnessed the group of market participants that pound their fist on the table for a certain outcome too many times to ever go back on it. They are simply tragic heroes going down with their ship. They are so inflexible and dug in, there is simply no turning back for them. Yet that group will tell anyone that has been Bullish, they are the one that is staying with a strategy that is ready to blow up.
It's pretty obvious when you think about it. Do you want to fall into one of those categories, or do you want to make money? At the depths of the February 2016 and December 2018 lows it was the taunts of:
"Can't you see what is going on around you? Why stay in this market? Can someone please make the case for markets to rise, or even tread water anywhere near where they are now?"
I attempted to answer those questions back then, to date the stock market confirmed those answers as correct. Owning equities when the sledding gets tough brings out the individual characteristics needed to be successful.
Granted this has been one of the most difficult periods in a while as stocks plummeted, then rebounded to new highs, only to pull back quickly from those highs. So now we see mixed market messages, and the logical conclusion for some is the one that takes stocks much lower from here.
However, anyone that has stayed long this market surely has listened to its message. Forgive me for being bullish when the primary trend is bullish and has not been broken in years. Yet that is interpreted by some as simply buy and hold forever. Not really. The bullish view is due to the fact that has been the backdrop despite pullbacks, corrections, etc. I would rather not disregard what has been fact and mislead people with enticing headlines to get attention. The stock market has confirmed that view.
As mentioned earlier, many can't seem to deal with any type of market drawdown today. Instead its let's raise a bundle of cash because they KNOW when the pullback will be over and they KNOW when the time will come to redeploy that cash down the road. Good luck with that.
As soon as fear enters the scene so does the same talk about how money needs to be managed when the S&P is 6% off an all-time high. It's the same unremarkable chant:
"We danced around this level, then we negotiated that level, and now we are in the camp that the S&P moves considerably lower". That all sounds great but it conveniently omits the reality of what really takes place in these market environments. That is because it conveniently omits the huge role the human mind plays while investing.
I submit the market participants that stayed the course are the ONLY people in the driver's seat now. I'll post this one hint for all to consider how correct that statement is with these questions. Who do you think was buying at the December lows and all during the subsequent rally? The people that had left the market a few weeks earlier? The investors that were following a strategy suggesting the market lows were not in at S&P 2,350? There is myth, then there is reality. So I submit it makes more sense to make a case for what actually occurred.
The investors who did NOT succumb to the fear and emotion, stayed put and didn't buy into the speculative rhetoric. Instead, they harvested nice gains in the rally off the lows. A rally that was questioned for four months. Who was doing the buying then? The fictional story being told is market participants that fled in fear, all of a sudden found religion and rushed back into stocks? Not likely, they couldn't get out fast enough and then questioned the rally because they seemed to KNOW the lows were not in, and they stuck to that notion. The rally was initially tagged as a dead cat bounce.
It's very easy to get out, not a simple decision on when to get back in. All the theories sound good until one starts to put them in practice in real life. and emotion usually eats them up. The market mind games will toy with the average investor.
Why revisit that scene again? It's simple. Many investors will succumb to the fear rhetoric and abandon the data points that they should be following. The SAME data points that were followed in December 2018. Arguments can be made for stocks going down from here, and stocks rising from here as well. For sure the latter is the minority view. The headlines can be scary, and that is why the alarming headlines mesh with the idea that stocks will fall before they rise.
Nothing is cast in stone here, the S&P is in no man's land, so most analysts combine the backdrop and see downside first. If an investor truly keeps all things in perspective, they realize the headlines are ruling the mindset. It would be foolish to lose sight of the overall market situation. If and when the market signals a change in the long-term trend, the appropriate action can be taken. I question whether that should be done at 6% from an all-time high.
Here is another hint. After the emotional tantrum has subsided, earnings will be the key, and the market is assessing that situation right now. At the end of the day, IF the entire trade issue does NOT affect corporate earnings to the extent that many analysts forecast, the bearish arguments become much weaker. That is because given the current forecasts, stocks are NOT wildly overvalued. In the short term, none of that may matter because emotion is in the room. Sentiment will outweigh logic for a while, just like we saw in December 2018. Right before all of the data was taken into consideration and stocks rallied.
The plan as always is to assess, reassess then assess again. The result of that process to date indicates to stay the course.
I would also like to take a moment and remind all of the readers of an important issue. In these types of forums, readers bring a host of situations and variables to the table when visiting these articles. Therefore, it is impossible to pinpoint what may be right for each situation. Please keep that in mind when forming your investment strategy.
to all of the readers that contribute to this forum to make these articles a better experience for everyone.
Best of Luck to All!
"A tough news backdrop now. It is hard to imagine a more difficult trading environment due to worsening tariff rhetoric. The gurus have spoken and investors are in a state of F.O.N.G.O, the "fear of not getting out". The fear of being trapped and losing all of their gains."
"The Savvy Investor Marketplace service is here to help. A developed strategy to garner the outsized bull market profits, while holding on to the lion's share of those gains. Use the techniques that have proven successful in the past. Please consider joining one of the most successful new ventures here on Seeking Alpha."
Disclosure: I am/we are long EVERY STOCK/ETF IN EVERY SAVVY PORTFOLIO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: My portfolios are ALL positioned to take advantage of the bull market with NO hedges in place.
I am LONG all positions in every portfolio mentioned.
This article contains my views of the equity market, it reflects the strategy and positioning that is comfortable for me. Of course, it is not suited for everyone, as there are far too many variables. Hopefully it sparks ideas, adds some common sense to the intricate investing process, and makes investors feel more calm, putting them in control.
The opinions rendered here, are just that – opinions – and along with positions can change at any time.
As always I encourage readers to use common sense when it comes to managing any ideas that I decide to share with the community. Nowhere is it implied that any stock should be bought and put away until you die. Periodic reviews are mandatory to adjust to changes in the macro backdrop that will take place over time.